On the verge: Micro and small businesses lay the foundation for production

A strong middle class, the backbone of thriving economies, could be the key to development for many Latin American countries. Not exempt from this model, Peru has already taken strides to support the growth of small businesses in the hopes of stimulating more internal commerce and self-sustainability.

Structure

While the concept of small and medium-sized enterprises has become quite universal in the past few years, Peruvian legislation further organises these businesses into an even more detailed category, which includes micro and small-sized enterprises (MSEs). According to the Development Finance Corporation, some 3.5m MSEs were registered in Peru as of April 2013, representing about 45% of the county’s GDP. Peru’s Society of External Trade reported that MSEs made up over 70% of the entire workforce in 2012. A July 2013 law changed the classifications of MSEs according to tax units of their sales, with one tax unit (unidad impositiva tributaria, UIT) being equivalent to PEN3600 ($1355). Micro-enterprises are now firms with sales of up to 150 UITs, and small companies are defined by 150-1700 UITs. According to a report released by the National Institute of Statistics and Informatics, as of June 2013, there were about 1.71m firms registered in the country, of which 96.2% are micro-enterprises, 3.3% small businesses, 0.2% medium-sized and 0.4% large firms, as per the criteria of the new law.

By activity, 44.4% of micro-enterprises are engaged in commerce, while 16.2% provide administrative, support and personal services. Despite accounting for the vast majority of companies registered, micro-enterprises represent only 5.6% of total sales. By contrast, large companies, which number 6210, account for 79.3% of internal and external sales in the country.

However, if these figures included the informal sector, they would most likely change significantly, according to Johann Spitzer, director-general of the Ministry of Production’s (Ministerio de la Producción, PRODUCE) Economic Studies Department. “The distribution of MSEs displays some of the problems Peru faces but also a huge space in which to grow,” Spitzer told OBG. “MSEs are fundamental to economic growth. They represent the path from informality to formality, and the government supports these enterprises with strategic plans.” The government has implemented several programmes and laws to support micro-enterprises, such as including them in a different taxation system to create incentives to remain formal and contribute to the economy. This has been carried out in government programmes to cut taxes as well as through education initiatives that aim to capture the informal sector’s attention.

Manufacturing

Although commerce and general services make up the largest activities within the MSE segment, small-scale manufacturing plays a significant role as well. Of the 151,832 formal businesses operating in the manufacturing sector, 99% are MSEs, according to a government study published in September 2013. As the largest sectors for formal MSE manufacturing, textiles and clothing have caught the eye of the authorities, who are keen to promote these industries as they have seen a recent fall in production levels. At the end of 2012, annual production of textiles had fallen by 9% and clothing by 13.2%, due mainly to lower demand in external markets, such as the US and Europe.

This drop in production has especially been felt in places like Gamarra, one of Latin America’s largest textiles and clothing centres with a radius of 24 square blocks, almost entirely comprised of MSEs. Located in Lima’s La Victoria district, Gamarra has traditionally been home to the bulk of clothing production. However, the area is slowly turning into more of a retail emporium as firms move operations to other districts of Lima. Two notable examples of companies that began as MSEs in Gamarra but have grown exponentially and entered the formal segment include Topitop, one of the largest Peruvian brand names, and Textiles Camones, in the high-end segment. Such success stories are rare though, and Gamarra still harbours much informal MSE production, with many firms relying on day labourers who line up outside shops in the early morning hours.

Legislation

In 2003 the Law on Promotion and Formalisation of MSEs (No. 28015) was passed as a temporary solution to formalise MSEs, providing tax breaks and general simplifications of the tax system. However, this arrangement ended in July 2013, meaning the benefitting group of MSEs now fall under the general labour system, increasing their production costs. According to Mario Fiocco, general manager of La Victoria Fá brica de Tejidos de Punto and president of the National Society of Industries’ (Sociedad Nacional de Industrias, SNI) clothing committee until April 2013, as a result of this many micro firms may return to informality, stop paying taxes and lose all the benefits they had gained. According to PRODUCE, in 2011 there were nearly 24,000 micro companies that benefitted from this special law, accounting for only around 1% of micro-enterprises in Peru. Mindful of this, the government extended the law’s benefits for three more years from July 2013.

Many sector specialists point to the deeper problem in the general labour system: the costs required to operate businesses. Indeed, the primary dissuasion for not going formal is production costs, according to Martín Reaño, manager of SNI’s Textiles Committee. “It is very expensive to become a formal company in Peru,” Reaño told OB, “so many companies remain informal. This way they will not be supervised and avoid possible problems with different government entities, which are restrictive to productivity.” Firms under the formal system must undergo constant inspections, and deal with environmental issues, taxes and municipal permits.

Incentives

Integration into the formal sector is slow, but other private initiatives have begun. According to Fiocco, many large and medium-sized companies subcontract to informal MSEs to cut down on their idle capacity and create incentives for formality, since under contracts, companies are required to pay taxes and register a corporate identity. One firm that has reached out to MSEs is Sudamericana de Fibras (SDF), a producer of acrylic fibre that has begun a credit assistance programme for micro-enterprises to enter the supply chain. Leandro Mariátegui, SDF general manager, told OBG the company sees this as an opportunity, since it considers small-scale textiles workers as flexible and able to fulfil market needs, such as shortages of certain products in different fashion seasons.

The government has also sponsored a PEN300m ($112.9m) programme to purchase subsidised clothes and shoes from micro firms for students in rural, poverty-stricken areas, as well as military uniforms. With overall positive feedback from the private sector, the project has been viewed as a success. Other initiatives have worked with the sector, such as Me Pongo